Using Non-Tax Sources To Fight Tax Battles: Are You Exposed?
In the last two weeks, various news sources have reported on a previously low-profile IRS initiative to use state land-transfer records to identify potential omissions in reporting gifts of real estate. (Via TaxProf here and the WSJ here.) According to the reports, the IRS is using information received from at least 16 states to identify transfers of real estate the value of which exceeded the $13,000 threshold for filing a gift tax return. As a result, the IRS is pursuing taxpayers who made such transfers but failed to file returns.
Although this particular example of the IRS building an enforcement case through the use of non-tax sources targets individuals, corporate tax professionals should not rest too easily. Most corporate taxpayers might not be engaged in such outright noncompliance as failing to file returns. Nevertheless, the volume of non-tax information that is available in the public domain – especially for large, public companies – poses potentially analogous risks to corporate taxpayers for the positions taken on their tax returns. Beyond the traditional sources of non-tax information, such as SEC filings and court documents, news articles and press releases proliferate over the Internet. Likewise, companies may face a new potential source of trouble in the proliferation of social networking sites. From LinkedIn resumes to Facebook profiles, information that reflects upon a company grows by the day.
Concern about this explosion of information should not be the exclusive province of marketing executives and public relations consultants. Indeed, whereas marketing and PR personnel might care only about whether a particular source reflects positively on a company’s brand, tax managers must consider another dimension – namely, the possibility that a source reflects positively or negatively on a company’s tax position.
As many companies have already experienced, revenue agents conducting examinations often use a variety of publicly available sources to support proposed adjustments to companies’ tax positions. For instance, claims from a company’s annual report about the value of its U.S. operations might be used to argue against a royalty being paid to a foreign affiliate. Likewise, statements from trade publication about economic projections in a company’s industry might be used to attack a company’s claimed business purpose for a transaction.
At the risk of adding yet another responsibility to already full schedules, corporate tax managers should be considering their exposure in these public sources of information as well. Although a company might not be able to control information that is published by independent sources (e.g., news articles), the company certainly should have internal controls regarding information being published by its own employees and advisors and should be cognizant of how such information can affect the company’s tax positions. At a minimum, this means adopting policies for employees who engage in social networking, to ensure that what is posted on such sites remains entirely personal or does not cast the company in a negative, and potentially tax-adverse, light.